DBRS Morningstar Assigns Provisional Ratings to LoanCore 2021-CRE4 Issuer Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by LoanCore 2021-CRE4 Issuer Ltd.:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

The initial collateral consists of 16 floating-rate mortgages secured by 22 mostly transitional properties with a cut-off balance totaling approximately $600.4 million, excluding approximately $79.4 million of future funding commitments and $30.0 million of funded companion participations. Most loans are in a period of transition with plans to stabilize and improve the asset value. The collateral pool for the transaction is static with no ramp-up or reinvestment period; however, during the Replenishment Period, the issuer may acquire funded Future Funding Participations and permitted Funded Companion Participations with principal repayment proceeds. The transaction will have a sequential-pay structure. Interest can be deferred for Note F and Note G and interest deferral will not result in an event of default.

All the loans in the pool have floating interest rates initially indexed to Libor and are interest only through their initial terms. As such, to determine a stressed interest rate over the loan term, DBRS Morningstar used the one-month Libor index, which was the lower of DBRS Morningstar’s stressed rates that corresponded to the remaining fully extended term of the loans and the strike price of the interest rate cap with the respective contractual loan spread added. When the fully funded loan balances were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), nine loans, comprising 53% of the initial pool balance, had a DBRS Morningstar As-Is debt service ratio (DSCR) below 1.00 times (x), a threshold indicative of elevated term default risk. Additionally, the DBRS Morningstar Stabilized DSCR for five loans, comprising 23.7% of the fully-funded pool balance, is below 1.00x, which is indicative of elevated refinance risk. The properties are often transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and the extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, affected more immediately. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis; for example, by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

Per the issuer, five loans were granted forbearances and/or loan modifications in connection with the coronavirus pandemic (One Whitehall, The Parking REIT Portfolio, University Square, Parke Green, and 1404-1408 3rd Street Promenade), representing a combined 29% of the cut-off date pool balance. The majority of the forbearances and modifications were short term in nature and included deferment or reductions on the Libor rates, waiver of monthly reserves, and/or reapplication of reserves to cover operating or other shortfalls caused by the pandemic. All payment deferments are required to be replenished or paid back within a year. Some modifications also included loan extensions from the initial terms. In addition, some tenants at certain properties have also requested rent relief and such requests are being considered on a case-by-case basis between the landlords and tenants.

The properties are primarily located in core markets with the overall pool’s weighted-average (WA) DBRS Morningstar Market Rank at 5.3, which is indicative of highly liquid, urban markets. Four loans, totaling 19.3% of the pool, are in markets with a DBRS Morningstar Market Rank of 8. These markets generally benefit from increased liquidity that is driven by consistently strong investor demand, and therefore tend to benefit from lower default frequencies than less-dense suburban, tertiary, or rural markets. Two loans, totaling 9.4% of the pool, are in markets with a DBRS Morningstar Market Rank of 7 or 6. The market ranks correspond to zip codes that are more urbanized in nature.

Two loans in the pool, totaling 16.2% of the total pool balance, are backed by a property with a quality DBRS Morningstar deemed to be Above Average. DBRS Morningstar provides for a lower probability of default for higher quality collateral. Furthermore, two loans, totaling 9.9% of the pool, are backed by properties considered to have Average + property quality.

The borrowers of all 22 loans have purchased Libor rate caps ranging between 1.9% and 4.0% to protect against rising interest rates over the term of the loan. The WA remaining fully extended term is 40.3 months, which allows the sponsors time to execute their business plans without risk of imminent maturity.

All loans have floating interest rates with original-term ranges from 24 months to 48 months, creating interest rate risk. All loans have interest rate caps ranging from 1.95% to 4.0% to protect against interest rate risk through the duration of the loan term. In addition to the fulfillment of certain minimum performance requirements, exercise of any extension options would also require the repurchase of interest rate cap protection through the duration of the respectively exercised options. Furthermore, DBRS Morningstar applied the lesser of the interest rate cap or the DBRS Morningstar-stressed forward interest rate based on the Unified Interest Rate Model. Of the 16 loans, 15, representing 97.5% of the trust balance, have extension options. In order to qualify for these options, the loans must meet certain requirements, including but not limited to minimum DSCR and loan-to-value (LTV) requirements. One property, 60 Tenth Avenue, representing 2.5% of the trust balance, has a current maturity of March 9, 2023, and has no extension option.

The overall WA DBRS Morningstar As-Is DSCR of 0.74x and WA As-Is LTV of 83.2% are generally reflective of high-leverage financing. The DBRS Morningstar As-Is DSCR is based on the DBRS Morningstar In-Place NCF and debt service calculated using a stressed interest rate. The WA stressed rate used is 4.9%, which is greater than the current WA interest rate of 3.4% (based on WA mortgage spread and an assumed 0.16% one-month Libor index). When measured against the DBRS Morningstar Stabilized NCF, the WA DBRS Morningstar As-Stabilized DSCR is estimated to improve to 1.24x, suggesting the properties are likely to have improved NCFs, assuming completion of the sponsor’s business plan. DBRS Morningstar associates its loss severity given default (LGD) based on the assets’ as-is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize but does account for the loan having been fully funded.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the current in-place cash flow. There is a possibility that the sponsors will not execute their business plans as expected and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing coronavirus pandemic and its impact on the overall economy. Failure to execute the business plan could result in a term default or the inability to refinance the fully-funded loan balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes LGD based on the DBRS Morningstar As-Is LTV assuming the loan is fully funded.

Nine loans, totaling 58.9% of the initial pool balance, represent refinance transactions. The refinancing within this securitization generally does not require the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a lower sponsor cost basis in the underlying collateral. Only two of the nine refinance loans, representing 10.9% of the pool, have a current occupancy of less than 80.0% and three of the refinance loans account for $23.3 million of the $79.4 million of future funding. This suggests that most of the refinance loans are near stabilization, which would mitigate the higher risk associated with a sponsor’s lower cost basis.

The 16-loan pool is concentrated by commercial real estate collateralized loan obligation standards with a low Herfindahl score of 13.7. Furthermore, the top 10 loans represent 80.1% of the pool. The 16 loans are secured by 22 properties located across 10 states and the properties are primarily located in core markets with the overall pool’s WA DBRS Morningstar Market Rank at 5.3.

The transaction has significant exposures to office (20.6%) and retail (36.4%) with a smaller concentration in retail/office mixed-use (6%) properties, which, in aggregate, account for 63% of the trust balance. Office and retail property types have experienced considerable disruption as a result of the coronavirus pandemic with mandatory closures, stay-at-home orders, retail bankruptcies, and consumer shifts to online purchasing. To account for the elevated risk, DBRS Morningstar typically analyzes retail (more specifically, unanchored retail) and office properties with higher probabilities of default and LGDs compared with other property types. For certain retail properties, DBRS Morningstar did not include upside from the sponsor’s business plan or accepted only minimal upside.

The transaction will likely be subject to a benchmark rate replacement, which will depend on the availability of various alternative benchmarks. The current selected benchmark is the Secured Overnight Financing Rate (SOFR). Term SOFR, which is expected to be a forward-looking term rate comparable with Libor, is the first alternative benchmark replacement rate but it is currently being developed. There is no assurance that the Term SOFR development will be completed or that it will be widely endorsed and adopted. This could lead to volatility in the interest rate on the mortgage assets and floating-rate notes. The transaction could be exposed to a timing mismatch between the notes and the underlying mortgage assets as a result of the mortgage benchmark rates adjusting on different dates than the benchmark on the note, or a mismatch between the benchmark and/or the benchmark replacement adjustment (if any) applicable to the mortgage loans. In order to compensate for differences between the successor benchmark rate and the then-current benchmark rate, a benchmark replacement adjustment has been contemplated in the indenture as a way to compensate for the rate change. Currently, Wells Fargo Bank, National Association in its capacity as Designated Transaction Representative will generally be responsible for handling any benchmark rate change and will only be held to a gross negligence standard with regard to any liability for its actions.

DBRS Morningstar notes that the Designated Transaction Representative parties in transactions have been negotiating a gross negligence standard of care and recently added a liquidated damages provision for 1.5x the indemnified expenses. While this may be understandable given the unknowns associated with termination of Libor, it could have an impact by increasing expenses.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:
-- Prospectus ID#1 – One Whitehall (10.8% of the pool)
-- Prospectus ID#2 – Uptown Worthington (9.5% of the pool)
-- Prospectus ID#3 – AVE Florham Park (8.8% of the pool)
-- Prospectus ID#4 – Horizon Sunnyvale (8.4% of the pool)
-- Prospectus ID#5 – Lumina Apartments (7.6% of the pool)
-- Prospectus ID#6 – The Royal Worthington (7.4% of the pool)
-- Prospectus ID#7 – 15000 Aviation (7.3% of the pool)
-- Prospectus ID#8 – 2221 Park Place (7.1% of the pool)
-- Prospectus ID#9 – The Parking REIT Portfolio (6.6% of the pool)
-- Prospectus ID#10 – Equus Business Center (6.5% of the pool)
-- Prospectus ID#11 – University Square (5.0% of the pool)
-- Prospectus ID#12 – Parke Green (3.6% of the pool)
-- Prospectus ID#13 – South Beverly Portfolio (3.1% of the pool)
-- Prospectus ID#14 – 1404-1408 3rd Street Promenade (2.9% of the pool)
-- Prospectus ID#15 – 455 Jefferson Street (2.8% of the pool)
-- Prospectus ID#16 – 60 Tenth Avenue (2.5% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American CMBS Multi-Borrower Rating Methodology (August 7, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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